There are times to sit back quietly and take it all in. And there are times, as will.i.am says, to scream and shout and let it all out. If we’re holding onto a type of exotic option known as a “shout option,” chances are good that we should be keeping our eyes peeled for those shouty times.
Why? Because shouting = profits. Allow us to explain.
Options are basically the right—but not the obligation—to buy or sell a security at a specific price and within a specific timeframe. When we call options “exotic,” it means they’ve got some sort of fancy twist to them (and they probably have a higher premium). When we call exotic options “shout options,” it means we can lock in certain profits at certain times during the life of the option, all by “shouting” at our broker whenever the strike price goes high on a call option or low on a put option. We’ll pay more for the privilege, but we might also end up making more money.
Googly Eyes, Inc. stock is currently trading at $24.50 per share, and we buy a call shout option with a strike price of $30. If Googly Eyes stock suddenly shoots up to $40 per share, we can “shout” at our broker, and she can lock in that $10 profit for us. Even if the price goes back down to $31.25, we’ve still locked in our $10. That’s pretty sweet, but this is even sweeter: if the stock price goes up to $45, we’re not just stuck with our measly ten bucks, oh no. We can continue to make money above and beyond the profits we’ve already secured. So, in this example, we’ve locked in $10 in profits, and now it looks like we’re going to make an additional $5. For put shout options, this whole process would just operate in reverse: the lower the stock price goes, the more profit we can potentially secure.
Shout options can be a really good time, but there are a few things we should keep in mind before we plunge in head-first. As mentioned, the premiums for exotic options are always more expensive than they are for “normal” options. That’s because they’re fancy, and fancy stuff...can get pricey. Also, the more volatile the security in question is, the more that premium can cost, since high volatility could mean there’s a lot more potential for profit. And third, because options like these are so complex, we’re not going to find them on major exchanges like the NYSE. They are OTC only. But if we’re looking to bring the action to our investment portfolio in a big way, it might be worth giving shout options a…shout.
Related or Semi-related Video
Finance: What is a Derivative?23 Views
finance a la shmoop what is a derivative? well it's derived it's a something taken
from something else like a derivative of hot weather is thirst a derivative of [Girl takes sip of glass of water on a beach]
hunger is well you know crankiness that's diva thing you get there...
derivative of a 1/32 quarterback rating in the NFL is like serious wealth yeah
yeah discount double shmoop yeah look for it be on there with aaron
and a derivative of a stock or bond or other security is a something which
derives its value based on the performance of that underlying security
there are basically two flavors of derivative put options ie the right to [Ice cream flavors appear]
sell a security at a given price over a given time period and a call option, ie
right to buy a security at a given price over a given time period
well the price of that option is derived from the price of the security and a few
other factors like strike prices and duration and all that stuff
colonel electric the downgraded new version of General Electric is trading [Colonel Electric appears in a suit]
for 25 bucks a share a derivative of its share price is sold in the form of a
call option with a $30 strike price expiring about 90 days from now on the
third Friday of the end of that month well investors pay a price albeit
probably a small one for the right to then pay 30 bucks a share for colonel [Call option appears for colonel electric]
electric at any time in the next 90 ish days until that option expires making the bet
that the stock will go well above 30 bucks a share in that time period that
call option is thus a derivative of the colonel electric primary stock price got
it if you really want to get personal well here's the ultimate form of
derivative [Baby laying down]
Up Next
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...
What is a call option? A call option is a type of contract that lets the investor buy shares of a stock at a certain price and within a window of t...